UK inflation has returned above 3% as soaring energy prices fuelled by the Iran war heap renewed pressure on British households.

Figures from the Office for National Statistics show inflation as measured by the consumer prices index rose from 2.9% in July to 3.1% in August. City economists had forecast a rise to 3.1%.

In a critical week for the economy, the Bank of England is preparing for a crunch decision on interest rates on Thursday against a backdrop of rising inflationary pressures from soaring oil and gas prices.

As fighting across the Middle East intensifies, fuelling turbulence in global financial markets, the oil price has soared this week to reach $109 a barrel – raising the prospect of a fresh squeeze on businesses and households.

Bond markets have been thrown into a tailspin, with intense selling pressure pushing the yield – in effect the interest rate – on US government bonds above 5% for the first time since 2023 and driving long-term UK government borrowing costs to the highest levels in decades.

The cost of petrol and diesel in Britain has reached fresh Iran war highs, with the average petrol price close to 170p a litre and diesel above 191p.

Threadneedle Street kept borrowing costs unchanged in July as it warned that a worst-case scenario in the Middle East – involving further escalation in the war – could drive UK inflation to a peak of 4.5% by the middle of 2027.

The chancellor, John Healey, will next month present a tough budget as rising inflation and higher borrowing costs complicate the task of funding Andy Burnham’s policy priorities.

More details soon …